Gundlach on Bonds: No Credit Bubble, Just ‘Naive Investing’

By Michael Aneiro

On Bloomberg TV this morning, DoubleLine‘s Jeff Gundlach says investors should sit tight in 2013 and beware some riskier investments in bonds. Gundlach says avoid the temptation to try squeeze out whatever remaining extra returns you might get in bonds next year, instead urging investors to keep cash into late 2013 so they can begin deploying it as risky investments start getting cheaper:

There has been more naïve investing going on in yieldy types of things like high-yield bonds…. When things reprice, they will be lower. In 2013, you’re going to have to learn to survive with virtually no return, and I actually recommend that. The amount of money you might make at this point… will be dwarfed by the amount of money you might lose when things reprice….

People want their investments to go up in a straight line, and people want to be earning 8% with zero volatility. That’s just not realistic. In investing you make 80% of your money in 20% of the time… You need to play it safe in the U.S. bond market.

Unlike Bill Gross, Gundlach doesn’t see bond-market leverage at pre-crisis levels. He’s also not ready to apply the term “bubble” to corporate bonds, and says current zero-interest rates severely limit future policy responses if another recession hits:

I don’t think you’ll see a repeat of 2008 because there’s not the same amount of leverage in the system….

I don’t think there’s a credit bubble at this point in time. The most powerful fundamental is that there is a zero interest rate, and that pushes people by necessity into riskier investments. I don’t think until there are substantial cracks in the credit system that you are going to see a selloff….

When the next recession comes, its going to be a real killer, because what is going to be the policy response? I don’t think its going to be very plausible to go back to pumping up the economy with debt. Its going to be a sort of cleansing.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.